Posts Tagged ‘depression’

by Janet Daley via the Ludwig von Mises Institute of Canada (originally posted on The Telegraph)
November 27, 2012

Forget about that dead parrot of a question – should we join the eurozone? The eurozone has officially joined us in a newly emerging international organisation: we are all now members of the Permanent No-growth Club. And the United States has just re-elected a president who seems determined to sign up too. No government in what used to be called “the free world” seems prepared to take the steps that can stop this inexorable decline. They are all busily telling their electorates that austerity is for other people (France), or that the piddling attempts they have made at it will solve the problem (Britain), or that taxing “the rich” will make it unnecessary for government to cut back its own spending (America).

So here we all are. Like us, the member nations of the European single currency have embarked on their very own double (or is it triple?) dip recession. This is the future: the long, meandering “zig-zag” recovery to which the politicians and heads of central banks allude is just a euphemism for the end of economic life as we have known it.

Now there are some people for whom this will not sound like bad news. Many on the Left will finally have got the economy of their dreams – or, rather, the one they have always believed in. At last, we will be living with that fixed, unchanging pie which must be divided up “fairly” if social justice is to be achieved. Instead of a dynamic, growing pot of wealth and ever-increasing resources, which can enable larger and larger proportions of the population to become prosperous without taking anything away from any other group, there will indeed be an absolute limit on the amount of capital circulating within the society.

The only decisions to be made will involve how that given, unalterable sum is to be shared out – and those judgments will, of course, have to be made by the state since there will be no dynamic economic force outside of government to enter the equation. Wealth distribution will be the principal – virtually the only – significant function of political life. Is this Left-wing heaven?

Well, not quite. The total absence of economic growth would mean that the limitations on that distribution would be so severe as to require draconian legal enforcement: rationing, limits on the amount of currency that can be taken abroad, import restrictions and the kinds of penalties for economic crimes (undercutting, or “black market” selling practices) which have been unknown in the West since the end of the Second World War.

In this dystopian future there would have to be permanent austerity programmes. This would not only mean cutting government spending, which is what “austerity” means now, but the real kind: genuine falls in the standard of living of most working people, caused not just by frozen wages and the collapse in the value of savings (due to repeated bouts of money-printing), but also by the shortages of goods that will result from lack of investment and business expansion, not to mention the absence of cheaper goods from abroad due to import controls.

And it is not just day-to-day life that would be affected by the absence of growth in the economy. In the longer term, we can say good-bye to the technological innovations which have been spurred by competitive entrepreneurial activity, the medical advances funded by investment which an expanding economy can afford, and most poignantly perhaps, the social mobility that is made possible by increasing the reach of prosperity so that it includes ever-growing numbers of people. In short, almost everything we have come to understand as progress. Farewell to all that. But this is not the end of it. When the economy of a country is dead, and its political life is consumed by artificial mechanisms of forced distribution, its wealth does not remain static: it actually contracts and diminishes in value. If capital cannot grow – if there is no possibility of it growing – it becomes worthless in international exchange. This is what happened to the currencies of the Eastern bloc: they became phoney constructs with no value outside their own closed, recycled system.

When Germany was reunified, the Western half, in an act of almost superhuman political goodwill, arbitrarily declared the currency of the Eastern half to be equal in value to that of its own hugely successful one. The exercise nearly bankrupted the country, so great was the disparity between the vital, expanding Deutschemark and the risibly meaningless Ostmark which, like the Soviet ruble, had no economic legitimacy in the outside world.

At least then, there was a thriving West that could rescue the peoples of the East from the endless poverty of economies that were forbidden to grow by ideological edict. It remains to be seen what the consequences will be of the whole of the West, America included, falling into the economic black hole of permanent no-growth. Presumably, it will eventually have to move towards precisely the social and political structures that the East employed. As the fixed pot of national wealth loses ever more value, and resources shrink, the measures to enforce “fair” distribution must become more totalitarian: there will have to be confiscatory taxation on assets and property, collectivisation of the production of goods, and directed labour.

Democratic socialism with its “soft redistribution” and exponential growth of government spending will have paved the way for the hard redistribution of diminished resources under economic dictatorship. You think this sounds fanciful? It is just the logical conclusion of what will seem like enlightened social policy in a zero-growth society where hardship will need to be minimised by rigorously enforced equality. Then what? The rioting we see now in Italy and Greece – countries that had to have their democratic governments surgically removed in order to impose the uniform levels of poverty that are made necessary by dead economies – will spread throughout the West, and have to be contained by hard-fisted governments with or without democratic mandates. Political parties of all complexions talk of “balanced solutions”, which they think will sound more politically palatable than drastic cuts in public spending: tax rises on “the better-off” (the only people in a position to create real wealth) are put on the moral scale alongside “welfare cuts” on the unproductive.

This is not even a recipe for standing still: tax rises prevent growth and job creation, as well as reducing tax revenue. It is a formula for permanent decline in the private sector and endless austerity in the public one. But reduced government spending accompanied by tax cuts (particularly on employment – what the Americans call “payroll taxes”) could stimulate the growth of new wealth and begin a recovery. Most politicians on the Right understand this. They have about five minutes left to make the argument for it.

“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.” – Strauss & Howe – The Fourth Turning – 1997

IN DECEMBER 2010 I WROTE AN ARTICLE CALLED Will 2012 Be as Critical as 1860?, THAT PONDERED WHAT MIGHT HAPPEN WITH THE 2012 presidential election and the possible scenarios that might play out based on that election. Well, 2012 has arrived and every blogger and mainstream media pundit is making their predictions for 2012. The benefit of delaying my predictions until the first week of 2012 is that I’ve been able to read the wise ponderings of Mike Shedlock, Jesse, Karl Denninger, and some other brilliant truth seeking analysts regarding what might happen during 2012. The passage above from Strauss & Howe was written fifteen years ago and captured the essence of what has happened since 2007 and what will drive all the events over the next decade. Predicting specific events is a futile human endeavour. The world is so complex and individual human beings so impulsive and driven by emotion, that the possible number of particular outcomes is almost infinite.

But, as Strauss and Howe point out, the core elements that created this Crisis and the reaction of generational cohorts to the implications of debt, civic decay and global disorder will drive all the events that will occur in 2012 and for as far as the eye can see. Linear thinkers in mega-corporations, mainstream media and Washington D.C. focus on retaining the status quo, their power and their wealth. They believe an economic recovery can be manufactured through monetary manipulation and Keynesian borrowing and spending. They are blind to the fact that history is cyclical, not linear. In order to have an understanding of what could happen in the coming year, it is essential to keep the big picture in focus. As we enter the fifth year of this twenty year Crisis period, there is absolutely no chance that 2012 will see an improvement in our economy, political atmosphere or world situation. Fourth Turnings never de-intensify. They exhaust themselves after years of chaos, conflict and turmoil. I can guarantee you that 2012 will see increased mayhem, riots, violent protests, recessions, bear markets, and a presidential election that will confound the establishment. All the episodes which will occur in 2012 will have at their core one of the three elements described by Strauss & Howe in 1997: Debt, Civic Decay, or Global Disorder.

Debt – On the Road to Serfdom

The world is awash in debt. Everyone is focused on the PIIGS with their debt to GDP ratios exceeding the Rogoff & Reinhart’s 90% point of no return. But, the supposedly fiscally responsible countries like Germany, France, U.K., and the U.S. have already breached the 90% level. Japan is off the charts, with debt exceeding 200% of GDP. These figures are just for the official government debt. If countries were required to report their debt like a corporation, their unfunded entitlement promises to future generations are four to six times more than their official government debt.

Any critical thinking person can look at the chart above and realize that creating more debt out of thin air to solve a debt problem is foolish, dangerous, and self serving to only bankers and politicians. The debt crisis took decades of terrible choices and bogus promises to produce. The world is now in the midst of a debt driven catastrophe. At best, the excessive levels of sovereign debt will slow economic growth to zero or below in 2012. At worst, interest rates will soar as counties attempt to rollover their debt and rolling defaults across Europe will plunge the continent into a depression. The largest banks in Europe are leveraged 40 to 1, therefore a 3% reduction in their capital will cause bankruptcy. Once you pass 90% debt to GDP, your fate is sealed.

“Those who remain unconvinced that rising debt levels pose a risk to growth should ask themselves why, historically, levels of debt of more than 90 percent of GDP are relatively rare and those exceeding 120 percent are extremely rare. Is it because generations of politicians failed to realize that they could have kept spending without risk? Or, more likely, is it because at some point, even advanced economies hit a ceiling where the pressure of rising borrowing costs forces policy makers to increase tax rates and cut government spending, sometimes precipitously, and sometimes in conjunction with inflation and financial repression (which is also a tax)?” – Rogoff & Reinhart

The ECB doubling their balance sheet and funnelling trillions to European banks will not solve anything. The truth that no one wants to acknowledge is the standard of living for every person in Europe, the United States and Japan will decline. The choice is whether the decline happens rapidly by accepting debt default and restructuring or methodically through central bank created inflation that devours the wealth of the middle class. Debt default would result in rich bankers losing vast sums of wealth and politicians accepting the consequences of their false promises. Bankers and politicians will choose inflation. They believe they can control the levers of inflation, but they have proven to be incompetent, hubristic, and myopic. The European Union will not survive 2012 in its current form. Countries are already preparing for the dissolution. Politicians and bankers will lie and print until the day they pull the plug on the doomed Euro experiment.

The false storyline of debt being paid down in the United States continues to be propagated by the mainstream press and decried by Paul Krugman. The age of austerity storyline gets full play on a daily basis. Total credit market debt in 2000 was $27 trillion. It skyrocket to $42 trillion by 2005 as George Bush and Alan Greenspan encouraged delusional Americans to defeat terrorism by leasing SUVs and live the American dream by putting zero down on a $600,000 McMansion, financing it with a negative amortization no doc loan. Paul Krugman got his wish as a housing bubble replaced the dotcom bubble. Debt accumulation went into hyper-speed in 2006 and 2007 as Wall Street sharks conducted a fraudulent feeding frenzy by peddling their derivatives of mass destruction around the globe. By the end of 2007, total credit market debt reached $51 trillion.

In a world inhabited by sincere sane leaders, willing to level with the citizens and disposed to allow financial institutions that took world crushing risks to fail through an orderly bankruptcy process, debt would have been written off and a sharp short contraction would have occurred. The stockholders, bondholders and executives of the Wall Street banks would have taken the losses they deserved. Instead Wall Street used their undue influence, wealth and power to force their politician puppets to funnel $5 trillion to the bankers that created the crisis while dumping the debt on taxpayers and unborn generations. The Wall Street controlled Federal Reserve provided risk free funding and took toxic mortgage assets off their balance sheets. The result is total credit market debt higher today than it was at the peak of the financial crisis in March 2009.

Our leaders have done the exact opposite of what needed to be done to address this debt crisis. The country is adding $3.7 billion per day to the National Debt. With the debt at $15.2 trillion, we have now surpassed the 100% to GDP mark. The National Debt will be $16.5 trillion when the next president takes office in January 2013. Ben Bernanke has been able to keep short term interest rates near zero and the non-existent U.S. economic growth and European disaster has resulted in keeping long-term rates near record lows. Despite these historic low rates, interest on the National Debt totalled $454 billion in 2011, an all-time high. The effective interest rate was approximately 3%. If rates stay at current levels, interest will be between $400 and $500 billion in 2012. Each 1% increase in rates would cost American taxpayers an additional $150 billion. A rapid increase in rates to the 7% level would ratchet interest expense above $1 trillion and destroy the last remaining vestiges of Bernanke’s credibility. It can’t possibly happen in 2012. Right? The world has total confidence in pieces of paper being produced at a rate of $3.7 billion per day.

Confidence in Ben Bernanke, Barack Obama and the U.S. Congress is all that stands between continued stability and complete chaos. What could go wrong? Debt related issues that will likely rear their head in 2012 are as follows:

A debt saturated society cannot grow. As debt servicing grows by the day, the economy losses steam. The excessive and increasing debt levels will lead to a renewed recession in 2012 as clearly detailed by ECRI, John Hussman and Hoisington Investment Management.

“Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.” – ECRI

At present, we observe agreement across a broad ensemble of models, even restricting data to indicators available since 1950 (broader data since 1970 imply virtual certainty of recession). The uniformity of recessionary evidence we observe today has never been seen except during or just prior to other historical recessions.- John Hussman

Negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012. Though partially caused by monetary and fiscal actions and excessive indebtedness, this contraction has been further aggravated by three current cyclical developments: a) declining productivity, b) elevated inventory investment, and c) contracting real wage income. In summary, the case for an impending recession rests not only on cyclical precursors evident in productivity, real wages, and inventory investment, but also on the disfunctionality of monetary and fiscal policy. – Van Hoisington

The onrushing recession will send housing down for the count. With 2.2 million homes already in the foreclosure process and another 13 million homes with negative or near negative equity, the recession will push more people over the edge. As foreclosures rise a self reinforcing loop will develop. Home prices will fall as banks dump houses at lower prices, pushing millions more into a negative equity position. Home prices will fall another 5% to 10% in 2012, with a couple years to go before bottoming.

The recession will result in companies laying off more workers. It won’t be as dramatic as 2008-2009 because companies have already shed 6 million jobs. The working age population will increase by 1.7 million, the number of people employed will go up by 1 million, but the official unemployment rate will drop to 7% as the BLS reveals that 10 million people decided to relax and leave the workforce. Surely I jest. The government manipulated unemployment rate will rise above 9%, while the real rate will surpass 25%.

The American people rationally increased their savings rate to 6.2% in the 2nd Quarter of 2009. When you are over-indebted and the country heads into recession, spending less and saving more is a sane option. Consumer expenditures accounted for 69% of GDP in 2007, prior to the economic collapse. The “recovery” of 2010-2011 has been driven by Ben’s zero interest rate policy, the resumption of easy credit peddling by the Wall Street banks, and consumers convinced that going further into hock to attain the American dream is rational. Consumer spending as a percentage of GDP has actually risen to 71% and the savings rate has plunged to 3.6%. The 20% drop in gas prices since April bottomed in December. This decline temporarily boosted consumer spending, but prices are on the rise again. With the State and local governments reducing spending, do the Wall Street Ivy League economists really believe consumers will increase their consumption to 73% of GDP and reduce their savings rate to 1%? If you open your local newspaper you will see the master plan. Car dealers are offering 0% financing with nothing down for 60 months. The GMAC/Ditech/Ally Bank zombie lives as subprime auto loans are back. The “strong” auto sales are a debt financed illusion. Ashley Furniture is offering 0% financing for 50 months with no payments through Wells Fargo Bank. When the Federal Reserve provides the Wall Street banks with 0% funding, banks are willing to take big risks knowing that Uncle Ben and the naive American taxpayer will be there to bail them out when it blows up again.

With recession a certainty as fiscal stimulus wears off, home prices fall, employment stagnates, and consumer spending grinds to a halt, what will happen to the stock market? The Wall Street shills paraded on CNBC and interviewed by the multi-millionaire talking head twits assure you that stocks are undervalued and the market will surely be up 10% to 15% by 2013. It’s a mortal lock, just as it has been for the last twelve years, with the S&P 500 at the same level as January 1999. The fact is the stock market drops 30% on average during a recession. The talking heads declare that corporate profits are at record levels and will continue higher. Not bloody likely. Corporate profit margins are at an all-time peak about 50% above their historical norms. Profits always revert to their mean. These profits are not sustainable as they were generated by firing millions of workers, zero interest rates for banks, fraudulent accounting by the banks, and trillions in handouts from the middle class taxpayers to corporate America.

In a true free market excess profits will draw more competitors and profits will fall due to competition. When corporate profits exceed the mean by such a large amount, you can conclude that crony capitalism has replaced the free market. Government bureaucrats have been picking the winners (Wall Street, War Industry, Big Media, Big Healthcare) and the American people are the losers. Corporate oligarchs prefer no competition so they can reap obscene risk free profits and reward themselves with king-like compensation. Mean reversion will eventually be a bitch. Real S&P earnings have reached the 2007 historic peak. To believe they will soar higher as we enter a recession takes the same kind of faith shown by Americans buying a $600,000 McMansion in Stockton with no money down in 2005. The result will be the same. Do you ever wonder how corporations are doing so well while the average American sinks further into debt, despair and poverty?

The brilliant John Hussman captures the gist of an investor’s dilemma in his latest article:

“With 10-year Treasury yields below 2%, 30-year yields below 3%, corporate bond yields below 4%, and S&P 500 projected 10-year total returns below 5%, we presently have one of the worst menus of prospective return that long-term investors have ever faced. The outcome of this situation will not be surprisingly pleasant for any sustained period of time, but promises to be difficult, volatile, and unrewarding. The proper response is to accept risk in proportion to the compensation available for taking that risk. Presently, that compensation is very thin. This will change, and much better opportunities to accept risk will emerge. The key is for investors to avoid the allure of excessive short-term speculation in a market that promises – bends to its knees, stares straight into investors’ eyes, and promises – to treat them terribly over the long-term.”

In a nutshell: Corporatocracy has replaced capitalism

CAPITALISM FIXES PROBLEMS AND PRESERVES DEMOCRACY: Capitalism is what we should be relying on to fix our problems. Capitalism has it’s own ecosystem, just like biology’s ecosystem. An economic ecosystem that weeds out the weak, has parasites that eat the failures and new bacteria that evolves and grows replacements for that which failed. A system that keeps everything in balance.

The problem is we are no longer a capitalistic society. What we were taught in school is now utter and absolute nonsense. Capitalism is a thing of the past. As outlined in “It’s Not A Financial Crisis – It’s A Stupidity Crisis”, we created two back to back bubbles. The air out of the Tech Bubble was sucked up for fuel by our next stupidity crisis: The Housing Bubble.

Now, after the second Stupidity Crisis there isn’t a third bubble to inflate. If we still lived in a capitalistic environment the banks and financial institutions that created loans for folks who should have remained renters and then sold those loans as investments to pensions and countries would have been cleansed by capitalism’s ecosystem. But that isn’t what happened.

In a very anti-capitalistic move the government decided that stupidity and criminal activity should be rewarded. I’d say they took our money, but it is worse, we didn’t have that much money. So they borrowed the money in our name. The loan has a variable rate. They borrowed so much money that our kids cosigned the loan. In fact, our kid’s future kid’s signed on the dotted line.

That is unequivocally immoral. They gave that borrowed money to a bunch of morons as a reward for stupidity. Morons who created subprime loans, liar loans, no income, no documentation loans and other fraudulent instruments. Morons bundled that trash, got it rated AAA and then sold these turds or weapons of mass destruction that they had the audacity to name complex financial instruments or derivatives to pension funds, countries and other “investors”. Then it all blew up.

Big surprise. For blowing up the world’s economy this Stupidity Crisis was falsely named an Economic Crisis by CNBS and 535 morons on a hill in DC (Ron Paul and a few other fiscally responsible adults excluded). The idiots who created the mess were rewarded with a 700 billion dollar “bailout”. This “bailout” was anything but a bailout and had a price tag of anything but 700 billion. The actual price tag is closer to 11 trillion and puts us on the hook for another 13-17 trillion – not counting interest.

Think about that for a second. This stupidity crisis is the equivalent of our Federal Debt which took a generations of politicians over a hundred years to wrack-up. For anyone who still believes we live in a free country where capitalism reigns please show me one economic textbook which states that failure, and fraud get rewarded with borrowed taxpayer money. For anyone who believes we live in a democracy please show me a textbook that says the government will en-debt you and your kids and their kids to pay for a failed business. How is that democratic?

“Law of Morons”: Years ago, while serving on a committee I came to a sad realization. Like gravity, there is the another invisible force which I dubbed “The Law of Morons”. Put a group of very intelligent, well meaning people in a room together, put them on a committee or some governmental body that is devoid of guiding principles or merit-based decision making and “The Law of Morons” will prevail. The collective IQ will drop to the smallest shoe size in the room. And hope for loafers, because collectively this body won’t be able to tie anything together – not even a single shoelace.

Government Creates Problems: Basically our government is comprised of many well meaning intelligent people who for whatever reason, re-election, greed the “Law of Morons”, corporate puppet strings (read: lobbyist), self interest, corporatocracy or whatever else, do nothing but create massive problems. Lack of regulation, too much regulation.

I STILL THINK THE MOST LIKELY SCENARIO IS THAT SOME AGREEMENT TO AGREE IS MADE AT THE SUMMIT, which is then followed up by increased printing from the ECB, coupled with new Fed policies and fresh IMF money. Although that still seems the most likely, I am getting concerned that Europe is once again missing the point.

Many EU leaders seem to actually believe that the Treaty changes are important. The reality is the market could care less about treaty changes. The market cares about only one thing, that the ECB will announce new, bigger, more aggressive sovereign purchases. That’s all the market cares about. The market believes that the treaty changes provide an excuse for the ECB and IMF to ramp up their efforts. The EU can do all the treaty changes it wants, but if it is not followed up with aggressive new printing policies, the markets will sell-off.

Not only are politicians acting as though the treaty changes mean much, there is even talk about being able to implement changes without national votes. That idea horrifies me on a personal level as it is yet again trashing any sense of democracy, but it is bad for the markets. I have been assuming that the meeting will result in another agreement to agree. That is relatively easy to pull together. Since it doesn’t really mean much, any countries that aren’t really on board, can be cajoled into holding hands for the photo op and pretending they agree long enough for the ECB and IMF to throw more money at the problem.

Agreement is far less likely if real permanent changes are being implemented. It is one thing to agree to the plan on the condition that you have to go back and get approval. It is much more risky for someone to agree to permanent changes implemented using some backdoor legal technique. Talk of actually implementing policy action this week is actually a negative as it makes it less likely that they can announce a “successful” summit.

On a side note, my favorite part of the proposal is the fines for going over the approved limits. So countries that have the biggest deficits will be fined, adding to those deficits? Debtor’s prison never worked very well, so why this would accomplish much is beyond me and would likely be waived any time it could be used. But no one on Wall Street has bothered to read the treaty proposals because no one cares, all anyone cares about is that the ECB uses it as an excuse to print.

Yesterday’s FT rumor of ESM and EFSF working together was yet another reason to be afraid that Europe doesn’t get it. Not only would implementing both at the same time place the AAA rated countries at greater risk of downgrade, it ignores the fact that EFSF has been a total failure. I thought Europe had moved beyond floating yet another iteration of something that hasn’t worked. The fact that they haven’t is a potential indication that the printing presses aren’t going to be turned on as soon as the market would like.

Finally, there is more and more talk about what the national central banks can do. People are acting as though they were cleaning the living room, and found some money when they lifted up the cushions on the couch. This is not “found” money. Participants and lenders are well aware of these reserves. They can be used for example to fund loans to the IMF to lend back to some countries, though I don’t fully understand why they can’t just lend to the countries directly, but I assume there is some law that lending to the IMF lets them circumvent. But there will be a cost to these actions. There will be a consequence, and although it will later be viewed as “unintended” the consequences are actually foreseeable. The countries with large reserves at the national central bank level have a reduced cost of funds because of those reserves. Lenders are not always totally stupid. There is value that is being realized from having those reserves. Using them to create loans for the IMF will impact that country’s ability to borrow. Plain and simple.

The fact that many pundits are treating this as newfound money that can be used any which way, without consequences is absurd and is yet another example of why so many ideas have failed. Any plan that raids the national central banks for money for the PIIGS needs to be thought through more carefully and the potential costs need to be addressed. The cost/benefit analysis may be worth the risk, but I suspect serious analysis would show that it is a bad idea. The cost/benefit should be about zero since it is just shifting money from one place to another. There really is no obvious reason to believe that this is a net positive. In the real world it is likely negative because as we have seen time and again, these changes break the existing model and that causes confusion which more than offsets any potential benefit (not triggering CDS is a shining example).

So while we limp along towards the most likely outcome, the risk of disappointment or even outright failure continues to grow. The inability to hold yesterday’s rumor rally is a signal that the market has moved well past the short squeeze phase and is now trading long.

THE EUROPEAN DEBT BUBBLE HAS BURST, AND THE REPRICING OF RISK AND DEBT CANNOT BE PUT BACK INTO THE BOTTLE. It’s really this simple, Europe: either rebel against the banks or accept decades of debt-serfdom. All the millions of words published about the European debt crisis can be distilled down a handful of simple dynamics. Once we understand those, then the choice between resistance and debt-serfdom is revealed as the only choice: the rest of the “options” are illusory.

The euro enabled a short-lived but extremely attractive fantasy: the more productive northern EU economies could mint profits in two ways: A) sell their goods and services to their less productive southern neighbors in quantity because these neighbors were now able to borrow vast sums of money at low (i.e. near-“German”) rates of interest, and B) loan these consumer nations these vast sums of money with stupendous leverage, i.e. 1 euro in capital supports 26 euros of lending/debt.

The less productive nations also had a very attractive fantasy: that their present level of productivity (that is, the output of goods and services created by their economies) could be leveraged up via low-interest debt to support a much higher level of consumption and malinvestment in things like villas and luxury autos.

Northern Europe has fueled its growth through exports. It has run huge trade imbalances, the most extreme of which with these same Southern European countries now in peril. Productivity rose dramatically compared to the South, but the currency did not.

This explains at least part of the German export and manufacturing miracle of the last 12 years. In 1999, exports were 29% of German gross domestic product. By 2008, they were 47%—an increase vastly larger than in Italy, Spain and Greece, where the ratios increased modestly or even fell. Germany’s net export contribution to GDP (exports minus imports as a share of the economy) rose by nearly a factor of eight. Unlike almost every other high-income country, where manufacturing’s share of the economy fell significantly, in Germany it actually rose as the price of German goods grew more and more attractive compared to those of other countries. In a key sense, Germany’s currency has been to Southern Europe what China’s has been to the U.S.

Flush with profits from exports and loans, Germany and its mercantilist (exporting nations) also ramped up their own borrowing – why not, when growth was so strong?

But the whole set-up was a doomed financial fantasy. The euro seemed to be magic: it enabled importing nations to buy more and borrow more, while also enabling exporting nations to reap immense profits from rising exports and lending.

Put another way: risk and debt were both massively mispriced by the illusion that the endless growth of debt-based consumption could continue forever. The euro was in a sense a scam that served the interests of everyone involved: with risk considered near-zero, interest rates were near-zero, too, and more debt could be leveraged from a small base of productivity and capital.

But now reality has repriced risk and debt, and the clueless leadership of the EU is attempting to put the genie back in the bottle. Alas, the debt loads are too crushing, and the productivity too weak, to support the fantasy of zero risk and low rates of return.

For years, European debt was being mispriced in the (over-liquefied, over-leveraged and over-speculated global) marketplace. Countries such as Greece, Portugal, Ireland, Spain and Italy benefitted immeasurably from the market perception that European monetary integration ensured debt, economic and policymaking stability.

Similar to the U.S. mortgage/Wall Street finance Bubble, the marketplace was for years content to ignore Credit excesses and festering system fragilities, choosing instead to price debt obligations based on the expectation for zero defaults, abundant liquidity, readily available hedging instruments, and a policymaking regime that would ensure market stability.

Importantly, this backdrop created the perfect market environment for financial leveraging and rampant speculation in a global financial backdrop unsurpassed for its capacity for excess. The arbitrage of European bond yields was likely one of history’s most lucrative speculative endeavors. (link via U. Doran)

In simple terms, this is the stark reality: now that debt and risk have been repriced, Europe’s debts are completely, totally unpayable. There is no way to keep adding to the Matterhorn of debt at the old cheap rate of interest, and there is no way to roll over the trillions of euros in debt that are coming due at the old near-zero rates.

IT’S REALLY SOMETHING TO LIVE IN A COUNTRY THAT DOESN’T KNOW what it is doing in a world that doesn’t know where it is going in a time when anything can happen. I hope you can get comfortable with uncertainty. If there’s one vibe emanating from this shadowy zeitgeist it’s a sense of the total exhaustion of culture, in particular the way the world does business. Everything looks tired, played out, and most of all false. Governments can’t really pay for what they do. Banks have no real money. Many households surely have no money. The human construct of money itself has become a shape-shifting phantom. Will it vanish into the vortex of unpaid debt until nobody has any? Or will there be plenty of worthless money that people can spend into futility? Either way they will be broke.

The looming fear whose name political leaders dare not speak is global depression, but that is not what we’re in for. The term suggests a temporary sidetrack from the smooth operation of integrated advanced economies. We’re heading into something quite different, a permanent departure from the standard conception of economic progress, the one in which there is always sure to be more comfort and convenience for everybody, the economy of automatic goodies.

A big part of the automatic economy was the idea of a “job.” In its journey to the present moment, the idea became crusted with barnacles of illusion, especially that a “job” was a sort of commodity “produced” by large corporate enterprises or governments and rationally distributed like any other commodity; that it came with a goodie bag filled with guaranteed pensions, medical care to remediate bad living habits, vacations to places of programmed entertainment, a warm, well-lighted dwelling, and a big steel machine to travel around in. Now we witness with helpless despair as these illusions dissolve.

The situation at hand is not a “depression,” though it may resemble the experience of the 1930s in the early going. It’s the permanent re-set and reorganization of everyday life amidst a desperate scramble for resources. It will go on and on until there are far fewer people competing for things while the ones who endure construct new systems for daily living based on fewer resources used differently.

In North America I believe this re-set will involve the re-establishment of an economy centered on agriculture, with a lot of other activities supporting it, all done on a fine-grained local and regional scale. It must be impossible for many of us to imagine such an outcome – hence the futility of our current politics, with its hollow promises, its laughable battles over sexual behavior, its pitiful religious boasting, its empty statistical blather, all in the service of wishing the disintegrating past back into existence.

This desperation may be why our recently-acquired traditions seem especially automatic this holiday season. Of course the “consumers” line up outside the big box stores the day after the automatic Thanksgiving exercise in gluttony. That is what they’re supposed to do this time of year. That is what has been on the cable TV news shows in recent years: see the crowds cheerfully huddled in their sleeping bags outside the Wal Mart… see them trample each other in the moment the doors open!

The biggest news story of a weekend stuporous from leftover turkey and ceremonial football was a $6.6 billion increase in “Black Friday” chain-store sales. All the attention to the numbers was a form of primitive augury to reassure superstitious economists – more than the catatonic public – that the automatic cargo cult would be operating normally at this crucial testing time. The larger objective is to get through the ordeal of Christmas.

I don’t see how Europe gets through it financially. The jig is up there. Lovely as Europe has become since the debacles of the last century – all those adorable cities with their treasures of deliberately-created beauty – the system running it all is bankrupt. Europe is on financial death-watch and when the money stops flowing between its major organs, the banks, the whole region must either go dark or combust. Nobody really knows what will happen there, except they know that something will happen – and whatever it is portends disruption and loss for the worlds largest collective economy. The historical record is not reassuring.

If Europe’s banks go down, many of America’s will, too, maybe all of them, maybe our whole money system. I’m not sure that we will see a normal election cycle here in 2012. A few bank runs, bank failures… gasoline shortages here and there… the failure of some food deliveries to supermarkets in some region… these are the kinds of things that can bring down a political system drained of once-ironclad legitimacy. All that is left now is the husk of ritual – witness the failure of the senate-house “super-committee.” The wash-out was so broadly anticipated that it was greeted with mere yawns of recognition. It would be like pointing at the sky and saying, “air there.”

This holiday season spend a little time musing on what the re-set economy will be like in your part of the country. Think of what you do in it as a “role,” or a “vocation,” or a “trade,” or a “calling,” or a “way of life,” rather than a “job.” Imagine that life will surely go on, even civilized life, though it will be organized differently. Add to this the notion that you are part of a larger group, a society, and that societies evolve emergently according to the circumstances that their time and place presents. Let that imagining be your new American Dream.

WHAT AN INCREDIBLE WHIRLWIND OF CRISIS from seven foul winds around the globe. Most emanate from Europe, which is far from its climax in crisis. Three steps will lead to full blown eruption, the first Italy with rising bond yields and a bank run, the second Spain with rising bond yields and admission that banks are far more insolvent than recognized, and third the failure of all three largest French banks as the principal swine creditor. In fact, a great split has occurred, as France has been cut off from the future world by Germany, which looks East to Russia and China. The Berlin leaders will not be needing French squires to carry their bags, but instead will watch as Paris becomes the appointed leader of the PIIGS. As the most exposed banks to Southern European sovereign debt, pig slop of immeasurable weight is tied around the laced Parisian necks. The common link across the Atlantic pond is derivative corruption.

The Europeans are doing their best to force feed a convenient but cockeyed definition of a debt default event. The Americans resort to old fashioned theft, calling it missing funds, blaming the crisis, while breaching the sacred segregated client fund directive. The crisis struck the US shores with the hidden JPMorgan chamber implosion and urgently needed theft, whose visible face is the MF Global heist and failure. My belief is that JPMorgan used its MFG patsy to anchor derivative trades, that just happened to be long sovereign debt in Europe. Nobody in his right mind, even a Corzine of GSax pedigree would place such large wrong trades unless obligated as a syndicate cog in the machinery. The big US banks will sit on the bankruptcy boards and decide the fate of victim accounts without client representation in a full scale insider exercise that makes a mockery of justice. That has been the American norm.

Witness the middle stage of the collapse of the COMEX, which has lost all trust as segregated client cash accounts vanished in a vast ongoing commingling campaign. One must conclude that JPMorgan must have really needed the money. The thought of a Madoff Redux comes to mind to the alert but weary. The MF Global vanished funds will eventually be measured over $3 billion. The actual Madoff pilfered funds totaled $150 billion, triple the more palatable figure often quoted. The locations of the missing funds have commonality, the ruling untouchable syndicate. Gold smells the destruction of the monetary and banking systems, aggravated by Western recession. Gold smells new application of debt to repair old failed debt structures, where central bankers chase their tails. Gold smells the vast reconstruction project for the giant Western banks, not too big to die of internal rot, only too big to let fail by a gavel.

The twisted bizarre attempt to control commodity prices by presiding over a series of negligent policies is coming to an end. The Western recession is too much for the insolvent banks to bear. The US banks have real estate debt rot, but the European banks have both real estate debt rot and PIIGS debt rot. In truth, the US banks share great risk from across the pond. The thrust of the French-based central bank over the pen of swine cannot be far from a formal announcement. Not quite what the highbrow French had in mind for leadership. Better to rule in clubmed pig slop than serve as lackey in the teutonic core.

GREAT CREDIT SWINDLE

The death of the monetary system has its main motive in the refusal of governments either to manage finances responsibly or to repay debt in the usual manner. They accumulate larger debts and plan the swindle of inflation in return. Their only viable approach, hardly a solution, is to inflate debt and thus to reduce its burden. Creditors feel betrayed, seek defensive measures, like to cut off credit and loan up quietly on gold, while lying about reserves. The creditors are not involved in the important decisions to debase the currency. Those decisions are made unilaterally by the debtors. A run on the US Treasury Bonds is occurring by angry foreign creditors. The USDollar is kept afloat by some secret corners. The pages of history are littered with examples of government debt default, but more often with the public paying for debt reduction in basic price inflation. The debts accumulated by many governments large and small cannot be repaid. History shows that tangible assets like Gold & Silver protect from the worst economic consequences. For the current financial crisis, only one pathway seems likely, although painful. The system cannot be remedied, only patched over. Vast inflation is the only politically viable method of repudiating these unmanageable obligations. Of key importance is the velocity of money in determining whether or not inflation turns into hyper-inflation, which requires final demand not to falter badly. Hyper-inflation requires sustained activity like an engine, which cannot stall. Higher price inflation is coming like night follows day, but probably not an extreme case. It will be painful though, since the cost structure will be the primary damage center. The US Consumer Price Inflation runs at 11.1% in the honest broker Shadow Govt Statistics calculation, which is painful enough.

The retreat is well along, the isolation to the hyper inflation machinery well along, the sovereign bond ruin well along. The Fed was hit with withdrawals of $83.3 billion on November 2nd, the largest withdrawals coming from its deposit accounts. This single day removal was the largest since February 2009, and not associated with quarterly tax payments. The withdrawals are being demanded by countries angered by USGovt policies, like China, Russia, Latin American, and other Asian players. It is only the beginning of a bloodletting. A run on USTBonds is in progress, covered up by Quantitative Easing and Operation Twist, programs given innocuous names but integral to the grand debasement process underway. The bond exodus is complemented nicely to significant removal of depository funds from the major banks in the ‘Move Your Money’ movement. Despite pleading by the big US banks for customers not to extract their money, impressively 650 thousand customers moved a total $4.5 billion dollars out of the big banks. The damage done is 10x to 20x, due to fractional banking practices. The funds went into smaller banks and credit unions in October.

TOO BIG TO FAIL: ASSURED FAILURE

The entire concept of Too Big to Fail is a hangman’s noose around the US banks and the banking system. The debate over cause or effect is curious. The related propaganda is obscene, if not comical. The smear campaign against gold will turn absurd, before the USDollar breaks permanently on the world stage, in the form of rejection in international commerce. It is called the Dollar Kill Switch, and it will be applied to the crude oil market. Conformity with the Too Big To Fail doctrine is synonymous with the path to systemic failure. Charles Hugh Smith sees the destructive force clearly. The absent liquidity of the biggest Western banks assures the systemic failure itself. Smith wrote, “The irony is that the propping up of a deeply intrinsically pathological and destructive financial system is not saving the economy, rather it is the reason the economy is imploding. The Big Lie technique of propaganda is to reverse the polarity of reality: we are told up is down until we believe it. We are told that liquidating the overhang of bad debt, leverage, and hedges would destroy the world as we know it. The truth is that keeping the zombie system from expiring and covering up the corruption with propaganda is actually destroying the world as we know it. Thus the collapse of the current financial system of central banks, pathological Wall Street, and insolvent banks would be the greatest possible good and the greatest possible positive for the global economy and its participants.”

G-20 SUGGESTION LEGITIMIZES GOLD

The G-20 group actually suggested that Germany donate a block of gold reserves for European banking system stability, as in to fortify the stability fund. Obviously the Germans told them to get lost and mind their own business. The German nation has been the ox & yoke to pull the Southern European cart for a decade. They have had their fill of seeing savings drained! The emerging nations showed a mix of chuptzpah and ignorance. Look for the PIIGS nations instead to forfeit their central bank gold in the next several months, part of the Chinese discounted purchase of sovereign bonds. The Chinese are not stupid, careful to put hooks in the deal. In a bold stroke, the G-20 finance ministers actually demanded that German Gold reserves be used to backstop the EFSFund for bank bailouts. The backward irony of the story is that Germany will in no way whatsoever hand over Gold bullion to stabilize a system it finds revolting on a beneficial one-way street. In doing so, the G-20 Ministers actually legitimized Gold as the premier asset. The fund seeks EUR 1 trillion but in reality needs EUR 3 trillion, possibly supplied via leverage. Much confusion has circulated around the story, not fully confirmed. But Reuters cited that, “The Frankfurter Allgemeine Sonntagszeitung reported that Bundesbank reserves, including foreign currency and Gold, would be used to increase Germany’s contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion Euros ($20 bn).”

The recipient of the alleged transfer would be the most insolvent of global hedge funds, the European Central Bank. One must suspect that no pledge was made, and a trial balloon was floated. It was promptly shot down. Germany has lost its appetite to make huge annual donations to support an unjustified standard of living for Southern Europe, which grossly lacks industry, a strong work ethic, and ability to collect taxes. Those nations abused the low Germanic interest rate, built housing bubbles, perpetuated young pension benefits, permit tax evasion, and face ruin. Germany will no longer sacrifice Euros at the foot of any PIIGS altar, plainly stated. Conclude that the EuroZone, the Euro Central Bank, and the European Financial Stability Facility are all dead broke and insolvent, and worse, have zero credibility in the capital markets. The real ugly controversy comes soon when collateral placed in return for grandiose aid will be lost, including some central bank gold bullion. The European Commission has no voice either, having pandered to the bankers.

GOLD PROPAGANDA & REALITY

The CME has advised that 1.42 million ounces of registered COMEX silver inventory is unavailable for delivery due to MF Global bankruptcy, as well as 16,645 registered ounces of gold also unavailable for delivery. That is a lot of bullion in breach of contract. The lawyers will be lined up very quickly to carve the metals exchanges into pieces. The COMEX is totally broken, unable to honor basic contracts, unable to deliver from committed legal contracts, unable to even protect client funds from commingling grabs. But during a period when investors cannot protect themselves, an ambush could easily come in the next week to push down the Gold price in the usual manner, via naked shorting. As the grandiose destinations become clear for vast new monetary creation, the Gold & Silver prices will run higher. The big immediate questions center on how much dithering the banker elite that run our governments will permit with malignant motive before the decisions are made, and how much economic deterioration will be permitted to contain commodity prices before the decisions are made. The destinations are bank bailouts for toxic sovereign bonds, recapitalization of the big Western banks, coverage of new USGovt debt, and economic stimulus. A few $trillion will be needed, as estimates by well-informed veterans mount like a stack of white papers. The economic damage is being done, even though the crude oil price has finally zipped above the $100 mark.

Ironically, as the orchestrated Libyan liberation war finished, the crude oil price has moved from $77 in early October to $102 today. Demand is not coming from economic growth, but from hedging against the ruined major currencies, all of them. Global QE is alive! With the gold market in turmoil from grand Asian raids, from absent COMEX inventory, from snatches of GLD inventory, from pilfered COMEX fringe accounts, from continued naked shorting, the safer bet with quicker payoff has been crude oil hedges. But Gold will have its day, and Silver will scoot through the opened phalanx as usual. The delay in reckoning is laden with frustration, but the day of $2000 is coming. It is something the bankers cannot stop. They are so busy kicking cans down the road, they do not see the Rotweillers and Dobermans sniffing their trails.

ITALY IS KAPUT, CONTAGION WILD

The biggest and most important danger signal for complete eruption of the Eropean financial crisis is the Italian sovereign bond. Their yield surpassed the 7% mark to sound great alarms, completing a Jackass forecast over the last several months. This level is the recognized crisis signal, the call to arms, the call to remove deposits, the call to demand collateralized loans. Their sovereign bond yield has zoomed upward in response to higher margin requirements. Italy is the next Greece, which was a crisis prelude. Italy scares the American and European central bankers witless. The Italian Govt Bond yield remained for 40 days above the 5% mark before it hit 6% two weeks ago. Its rise has accelerated, as the panic widens. The Italian yield suddenly surged past 7% with haste last week, reaching 7.5%, setting off shrill alarms. The Italian leadership is in question, its Prime Minister to be a victim. The 10-year yield went below 7% only because of heavy emergency buying by the Euro Central Bank, against their stated wishes. The Italian banks are far weaker than they reveal. The next PIIGS domino is soon to fall, for certain to take down Spanish Govt Bonds also. The new head of the EuroCB, the resplendent GSax pedigreed Mario Draghi, must cover the debt or watch the European Monetary Union crumble in a sea of fire. The central bank must make overt commitments of magnitude. If the crumble happens upon inaction, expect 20 Lehman events with numerous bank failures, starting with France. The conflagration would extend to London and New York.

The market is stating that Italian Govt repayment of rollover debt is in crisis mode, highly unlikely. Italy must roll over more than EUR 360 billion (=US$490 bn) of debt before end 2012. The borrowing costs for Italy have become highly burdensome, if not crippling and destructive. The debt rollover in upcoming auctions stands as the immediate event to watch. Lenders do not wish to hand money to Italy for servicing past debt interest, good money after bad. Even if budget reforms succeed, the austerity measures will constitute more poison pills that assure a faster economic recession from cut projects, more unemployment, and hostile response by the public, like worker strikes. Recall Jackass comments made a year ago. The prevailing opinion was that Italy had favorable debt ratios, like cumulative debt to GDP, like annual deficit to total budget. My objection was that ratios mattered little, when the required debt volume to finance was too large in a crisis filled bond market. My forecast was for Italy to erupt along with Spain eventually. That viewpoint has turned out to be correct.

Barclays has declared that Italy is finished kaput. The next Greek ruin on the plaza square is happening in Rome. The bond market is rejecting Italy loudly. Italy has dragged its feet for two months, rejecting warnings, refusing budget cuts, while its prime minister has given defiant messages loaded with denial. He even accused financial journalists of causing a run on their bonds. Time has run out on Italy. Watch for France to catch the viral contagion, being a major creditor. The Euro Central Bank is the only buyer of Italian Govt Bonds. They are the focus for action. When Italy erupts, it will spread to Spain first, and then quickly to France as its primary creditor. The nation of Spain is not in the news much at all, but it will be next year, just like Italy with the same type of problems, but compounded by a bigger housing bust. The research staff at Barclays in London has declared that Italy is formally finished and cooked, as they put it “Italy is now mathematically beyond the point of no return.” The Greek tragedy has finally struck Italy. Expect violence on the streets of Rome and other cities, an Italian tradition where innocuous brands of communism have splintered roots.

BANK RUN NEXT FOR ITALY

An invisible bank run is occurring in Italy. Their banks are trapped, attempting to de-leverage on a perilous tightrope forced by tightened bank reserve requirements. They have developed a big dependence on Euro Central Bank funds. The Credit Default Swap market indicates an expected Italian default. Next the bank deposits will exit. Italian banks have grown overly dependent on the European Central Bank. They borrowed EUR 111.3 billion (=US$152 bn) from the central bank at the end of October, up from EUR 104.7 billion in September and a smaller EUR 41.3 billion in June, as per Bank of Italy data. The five biggest lenders accounted for 61% of the country’s draw on ECB funds in September, double that of January. The banks include UniCredit, Intesa Sanpaolo, Banca Monte dei Paschi di Siena, Banco Popolare, and UBI Banca. These distressed banks must reduce their debt load in a highly dangerous bond environment marred by distrust and volatility. The decline in Italian Govt Bonds has rendered great damage to the private banks, reducing their reserve ratios and eroding loan collateral devoted to support regular business credit.

The Italian banks are trapped in the Italian sovereign debt securities. The austerity plans being forced will ensure a recession, thus even more losses for the banks. The run on Italian banks is just beginning, to become more visible in a couple months. The bond market expects some calamities. The debt insurance for individual banks demonstrates the extreme level of distress. European private banks are dumping sovereign bonds, hampering the already strained market. They are forced to comply with tougher newly enforced BIS reserves requirements. They are fighting to survive, but exposing the sovereign bonds as junk, and worse, dragged down by old real estate debts just like in the United States. The entire system is collapsing without potential remedy unless all major banks are liquidated, and that will never happen. They house the political power center, and the bond fraud laboratories. At the heart of the vulnerability is the fractional banking system itself. Insolvency arrives quickly and only worsens until a run occurs. Then comes rampant bank failures.

THE EUROPEAN BANKING SYSTEM IS TOPPLING. IT CANNOT BE STOPPED. GREAT CONTROVERSY WILL RESULT. MOST LARGE BANKS ARE POSTING HUGE LOSSES FROM GREEK EXPOSURE. THE NEXT ROUND OF LOSSES FROM THE OTHER P.I.I.G.S. NATIONS WILL BE AN ORDER OF MAGNITUDE LARGER. THE EXTREME BREAKDOWN WILL OCCUR WHEN THE BIG FRENCH BANKS GO BUST.

Even Citigroup chief economist Willem Buiter recognizes the extreme risk and dire nature of the situation in Europe. He said, “I think we have maybe a few months, it could be weeks, it could be days, before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy, which would be a financial catastrophe dragging the European banking system and North America with it. So [the central banks] they have to act now.” Look for enormous Dollar Swap Facility usage for covering PIIGS bonds, in particular from Italy and Spain. The French Govt Bonds will be next under attack, like in January. Their yields remain low, but they are rising, and the Bund spread is widening. My guess is that the swap facility is already being tapped in heavy volume, on days the Euro currency rises especially.

COUP DE GRACE IN FRANCE

France introduced budget austerity, a surefire time bomb for the big banks that teeter in Paris. Nothing was learned from Greece, where recession is accelerating from the poison pills. The French banks bear the largest load for Italian Govt debt, more than double the German load and almost half the entire European load. France is tied with the lethal umbilical cord from Italy. The Dexia exposure to Greece and Italy has been detailed. German banks are not immune from big losses, nor immune from the financial crisis. Commerzbank suffered a big loss, typical of the German banking sector. With all the attention last month given to the big French banks, the weak links inside the German banking system are only recently coming to light. They are less but still sizeable. US banks are deeply exposed to European Govt debt default insurance. The risk is not offloaded, but rather shared and joined. The risks are rising astronomically for American banks, while large commitments are made, and partnerships are formed. The US press blithely reports a condition of near immunity of US banks from the financial crisis separated by an ocean. Great controversy lurks on insured debt.

If the regional recession does not pull France down, its banks will. They will succumb to horrendous Italian exposure. Notice the French banks have three times as much debt with Italian companies, versus Italian Govt debt. As the Italian Economy slides rapidly into recession, a considerable portion of the nearly $400 billion in total debt exposure will go rotten. One can see that Italy is Greece times seven. German banks are also on the hook for Italian sour grapes, but less than half the total.

The Spanish Govt Bond is the fuse that lights the Semex behind the French bank failures. Their bond yields surged past 6% as the contagion spreads. The bonds of Spain will endure similar pressures as Italy, deep scrutiny, and relegation to the Euro Central Bank outhouse, the major bagholder. The banking system in Spain operates on fairy tale reserves. The Spanish Economy is weighed down by 23% jobless rate. All PIIGS nations will be crushed by the crisis, no nation spared. Spain has officially entered the red zone as their sovereign bonds have been targeted. They have solved nothing, dealt with nothing, and downgraded no bank assets, preferring to live in a make believe world. While the Italian Govt Bond yield has relaxed toward levels below 7%, the Spanish Govt Bond yield has risen steadily since August from 5% to above 6% in an unrelenting march. It took five weeks to breach the 6% level, once the 5% level was breached. The Euro Central Bank is reported to be actively purchasing sovereign bond from both countries, to stem the crisis. Their efforts are futile, since private bank sales rise to supply the central bank at the window. After the official purchases, the private banks are highly reluctant to purchase anew, since that bond market has been badly tainted.

THE CARDIAC MEASURES

The Italian & Spanish Bovt Bonds are in big trouble, but the sleepy story is how France will soon join the PIIGS as the leader in the toxic sloppy pen where monetary paper feces spews openly. Some heavy damage is being quietly done on French bonds, where the banks hold much of their own national debt and the toxic Italian debt. Some claim it is game over with Italy on the ropes. My view is that the game is almost over, as the Italian debacle has spread quickly to Spain. But the main event in the recognized implosion is the sudden failure of all three of France’s big banks. When Societe Generale, BNP Paribas, and Credit Agricole all go bust in a sudden burst wave of insolvency, illiquidity, and recorded losses to their artificially lifted balance sheets, the game is truly over. Then and only then, the great reconstruction of the European banking system will begin, complete with $3 trillion in freshly printed money. The Gold market comprehends this fact, and anticipates it fully, with patience. The MF Global corrupted chaos has put a new log in the golden road.

REDEFINED DEBT DEFAULT

The bank leaders have attempted to redefine debt default, as part of the bailout fund negotiations. This is the latest deeply corrupt practice, with some objection showed by the major debt rating agencies. Any loss of original debt security terms is a default, whether voluntary or blessed by the elite cartel. Expect court action and lawsuits in response. Another angle is being covered, whereby redenomination of debt in another currency is also declared not a default event. Great lengths are being taken, for a simple reason. A string of Credit Default Swap claims on debt default would expose the entire market as corrupted and under-funded by a wide margin to honor claims. With defaults, all the big banks would die in a flash. This is huge issue not addressed that invalidates an entire shadow-filled market. If sovereign bonds cannot be hedged effectively and predictably, the bond yields will rise fast from lack of demand. Watch out below for Italy. European banks will suffer losses without buffers that were expected to serve as hedges.

FRAUD OR JPMORGAN RUPTURE?

Coverage to the MF Global fraud, theft, and violation of the financial markets is full of intrigue and bold strokes. A sacred pledge has been broken against segregated accounts and their partitioned sanctity. Witness the second stage of the grand American fraud exposure. The first stage was the subprime mortgage fraud, with Lehman Brothers kill, JPMorgan assert grab and reload, followed by the TARP Fund dispersal, and the mortgage contract forgeries. The MF Global theft exposes the lack of integrity in the financial futures markets, and one step closer for the death of JPMorgan, which is plugging holes rather than permitting a COMEX default. Over a thousand gold contracts will not be delivered, a breach. Over ten thousand silver contracts will not be delivered, a breach. The final stage could feature a bank holiday and background heist of personal accounts. Some thought such forecasted warnings to be wild and reckless, but look at the pilfered futures cash accounts. Precedent has been set, warning given. Nothing is safe in the American system. Veteran traders should have known better, like Gerald Celente, whose accounts are locked up, cash and all. What a travesty and blight on the US system! Time is slim to remove money from the US system, whose banner is fraud.

MF Global is a more visible and flagrant breach and desecration than the Madoff Fund fraud and theft. The total missing Madoff funds was reported to be $50 billion, when the actual total was closer to $150 billion. The MF Global missing funds are reported to be $650 million, when in reality the total is closer to $2 to $3 billion. MF Global has located $658.8 million in customer funds in a custodial account at JPMorgan Chase, which contained a total of $2.2 billion as of October 31st, including both the MFG money and customer funds, pure commingling of funds. This is a smoking gun certain to go unpunished.

My belief is that JPMorgan stole the easily accessible funds placed too close to the action. Harbor doubts that CEO John Corzine will be indicted or serve prison time. The FBI is on the case. Their investigation will most likely be as effective as with Madoff, and recall they protected Goldman Sachs three years ago when a Russian man snatched the Unix software used by GSax for insider trading. It viewed incoming orders on the NYSE microseconds before the orders were executed. The FBI arrested the man, the illegal trading trail went cold, and the venerable firm continued doing God’s work. In my view, the MF Global case will render irreparable harm to the US financial system on the commodity side. Countless professional traders and their firms recognize the threat to segregated accounts and their sanctity. Trust is gone, and so is their money. No new money will enter those tables.

Safeguards did not merely fail, they were abused once more in a long list of fraud events. The Commodity Futures Trading Commission has failed on the job for the public, while doing an excellent job for the syndicate in power led by JPM and GSax. The next sham charade will be the big US banks serving on the creditor committees to oversee dispersal of funds that they were not able to steal already. JPMorgan is the agent for a $1.2 billion syndicated line of credit to MFG. It was named to the committee despite also having a $300 million secured loan against the MFG brokerage unit, a position pitted against other unsecured creditors in an obvious conflict of interest.

JPMorgan slapped a lien on MF Global assets in an audacious maneuver. A formal dance is in progress, where the public is amateur. Lack of cooperation has been given by MF Global so far. Witness a possible hidden derivatives meltdown, as the European implosion has a conduit to the United States. With inter-bank lending so scarce, many Wall Street banks extended heavy loans to the distressed European banks in the last couple months. The story is not told that way, only as a large financial firm failure run by an ex-Senator and ex-Governor, a fallen pillar in the financial crisis. What has happened could be a critical step toward the ruin of the COMEX itself, and its transition into a Cash & Carry operation for precious metals. The reins holding back Gold are slowly vanishing or being discarded.